SpartanNash Co (SPTN) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Spartan Stores, Incorporated fourth quarter earnings conference call. All participants are in a listen-only mode. We will conduct a question and answer session. Instructions will be provided at that time for questions. If you have difficulties hearing the conference, press * 0 at any time. The call is being recorded. Now I will turn the conference over to James Meyer. Go ahead.

Thank you for calling in today to the fourth quarter and fiscal 2002 year-ending earnings conference call. If you don't already have a copy of the press release issued yesterday, you can call our office at 666-878-8319. Ask for Jeanne Norcross, she will be happy to fax you one. With me today is CFO Dave Staples and several other associates. Our comments contain forward-looking statements, which may contain plans, expectations, estimates and projections that involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that might cause a difference include, but are not limited to competitive pressures among food, retail and distribution companies and other factors described in our annual report on form 10k and other filings with the SEC. Spartan Stores disclaims any intention or obligation to update or revise forward-looking statements.

I will provide you with a broad, financial overview of the quarter and turn the call over to Dave for additional financial details. Following Dave's discussion, I will review the progress we are making in our retail and distribution operations. More specifically, I will cover the operational changes we have made since the third quarter, that are already driving performance improvements in our Ohio retail operations. The financial results for the fourth quarter fell below our original expectations. Consolidated sales declined to 764.8 million last year, excluding the effect of an early Easter holiday this year and the 53rd week of sales in last year's fourth quarter. Consolidated net sales would have been 756.3 million this year compared to 800.6 million last year, a decline of 5.5 percent. Dave will walk you through the sales results, excluding those two factors in just a minute. Although we reported a net operating loss for the quarter, we expect our overall operating profits to improve in each quarter of fiscal 2003. As mentioned in our third quarter earnings release, we began implementing measures to improve the Ohio retail store performance in the fourth quarter and are encouraged by recent improvements in certain performance. Our rate of retail-sales decline recently improved by one-third in our Ohio market. Our gross profit margin began to improve late in the fourth quarter. Although these signs are preliminary, we believe they demonstrate recently implemented actions are working. We do not expect these steps, however, to show meaningful financial improvement until late in fiscal 2003.

We began fiscal 2002 with high expectations, due to the outstanding performance we achieved in fiscal 2001. The disappointing results for the fourth quarter and year were influenced by a number of factors that we have previously discussed. These factors include retail competition in our Ohio market, sustained weak economic conditions in Michigan, unfavorable mild winter in Michigan markets and retail execution in our Ohio markets. Our northern and western Michigan retail operations profitability has improved over the prior year, while being subject to weak demand factors that are beyond our control.

Recent economic reports for the Grand Rapids area indicate unemployment reached the highest level in January, at 7.1 percent. This represents an increase of 3 percent in the last 12 months. We believe that these particular market conditions are similarly affecting performance results of other retailers in the Michigan market. We expect these conditions to improve gradually over time. Even though our recent financial performance has declined, we have made considerable progress during the past 12 months that is not evident in financial statements. For example, we began a project reorganization to increase our focus on category management, replenishment buying, perishables and nonperishables, signed a new labor agreement with associates and drivers, giving us improved work flexibility and significantly upgraded our information technology systems in retail stores and distribution centers.

Although these actions will not immediately contribute to our financial growth, they are vital to our operational efficiency and improvement efforts and lay the foundation for growth. These steps alone, however, are not enough to drive our performance to the next level. The second half of fiscal 2002 we began to take a much more critical look at our business and in particular, our Ohio retail operations. As we peel back and evaluated each layer of operation, it became obvious that certain programs were not meeting expected performance levels. Consequently, we have taken a hard look at operations and management and have made additional changes that I will share with you following Dave's review of the quarterly preliminary financial results. Dave.

Consolidated sales declined 11.7 percent to 764.8 million, from 865.6 million in last year's 13-week fourth quarter. Sales decline was due to one less week of sales in this year's fourth quarter, which accounted for $65 million. The other market factors Jim just mentioned. You may recall we added two new accounts that will more than offset the annual revenue loss from the K-mart account. However, we did not begin shipment of these accounts until late in the fourth quarter. The overall consolidated sales decline was offset by the early Easter holiday, which was included in the fourth quarter this year. The early holiday accounted for 9 million in sales. Gross margins for the fourth quarter declined 20 basis points to 16.3 percent, compared to 16.5 percent in the corresponding period last year. The decline was due to larger-than-anticipated markdowns on seasonal items and higher-than-expected inventory shrinkage from softer-than-expected sales volumes. Fourth quarters SG&A expense, declined 6.2 million from last year's fourth quarter, due to the 53rd week of expense in last year's fourth quarter. However, the decline in revenue and a full quarter of store operations from our Prevo acquisition pushed SG&A expense to 16.4 percent, compared to 15.4 percent last year. EBITDA decreased. The lower sales and gross profit margins reported a loss of 900,000 compared to operating income of [inaudible]. Look at our segment information. Sales in the retail grocery segment declined 7.4 percent to 312.2 million. The decline was due to the issues previously mentioned, including the 53rd week of sales in last year's fourth quarter, competitive conditions in the Ohio market, weak economic conditions in Michigan and the unfavorable warm winter season in Michigan. We operate 37 stores in resort communities in Michigan. The 53rd week of sales in last year's fourth quarter amounted to $25 million, excluding the extra week from 2001's fourth quarter and early Easter holiday this year, comparable store sales declined 6.6 percent. Retail segment reported loss of 5.7 million, prepared to break even in fiscal 2001. We reported a net loss for the quarter, we have taken a number of steps to improve our performance and have shown encouraging results. Quarterly sales in our grocery distribution segment declined 17.9 to 261.3 million from last year. The sales decline related to the issues I have covered and sales eliminated as a resulted of the Prevo acquisition late last year, as well as cycling through the loss of a customer in the second quarter. Factor out the extra sales week last year and the early Easter holiday this year, sales declined 13 percent from 296 million last year. That earnings declined to 1.1 million compared with 1.5 million in the corresponding period last year. The decline was the result of lower sales volumes, partially offset by favorable interest rates. Fourth quarter sales for the convenience store segment declined to 189.6 from 209.8 million in the prior year fourth quarter. Excluding the extra week of sales [inaudible] and the loss of K-mart business, sales were relatively flat compared to last year's fourth quarter. Net earnings declined to 400,000. The decline in this segment's net earnings was related to the timing of cigarette pricing increases. The earning shortfall from our original guidance was magnified as a result of timing issues. These issues related to 1 million of anticipated cigarette price increases in the convenience store division and 2 million in real estate sales gains we were expecting to report in the fourth quarter, but did not materialize. Turning to the balance sheet, during the fourth quarter, we reduced the outstanding balance on revolving credit line by 30 million dollars in the final two periods of the quarter, while making scheduled debt and interest payments of 11 million. The reduction was accomplished through inventory reduction efforts and the use of cash flow. We believe this speaks well of our solid cash flow. During the upcoming year we expect to realize an additional 10 to 15 million in proceeds from our ongoing efforts to liquidate non-operating assets. It is important to note that our portfolio, is not a part of the liquidation program and is estimated to have a market value that exceeds book value by $75 million. Our capital expenditures for 2002 were 35 million. We are expecting capital expenditures for 2003 to range from 25 to 30 million, with depreciation of 45 to 50 million. Lastly, at the present time, we anticipate reporting a first quarter non-cash charge of $35 to $45 million for the adoption of the new accounting SFAS142, goodwill and other assets. I will now turn the call back to Jim for closing remarks. Jim.

Thanks. First, although we had our first quarterly loss as a public company, we expect operating profits to improve in 2003. I would like to take this opportunity to state that we have made considerable progress over the past 12 months and I would like to thank our managers and associates for all their hard work and effort that has put us where we are. I will now cover where our efforts will be focused in 2003, and the other significant changes we have made since our third quarter earnings announcement. During fiscal 2003, our primary focus will be to improve three key value drivers. Those include improving our sales growth rate, improving gross profit margin and a continued effort to lower our operating cost structure. Our actions during this year are intended to considerably improve each of these value drivers while strengthening our long-term competitive position.

As stated in our press release, executive and regional management changes have been made in our merchandising and store operations group. The most significant change was the departure of our executive vice president of store operations and merchandising. Under the present structure key marketing merchandising and store operations positions now report directly to me. Our Ohio region divisional vice president of retail operations has also been replaced and we are very pleased to welcome Tom Tobin to our management team. Tom has extensive background in retail grocery operations, category management and merchandising. His most recent position was vice president of East Coast SuperCenter operations for the K-mart corporation. He held key merchandising and store operating positions with Super Value, Rainbow Foods, HEB and Wal-mart. We firmly believe that the changes in these key positions were imperative to get our Ohio retail operations on track and performing at the high standards we expect. Secondly, we have established direct executive level oversight of our retail store operations in Ohio and are currently implementing that oversight in our Michigan market. The oversight consists of weekly meetings with key operating management personnel to discuss financial and operational targets, deviations from the targets and the actions taken to correct target shortfalls. These meetings are being used as channels for best practices to the entire store base. They have already produced more rapid and successful competitive responses to market specific conditions. They have led to an improvement in retail customer service and improvement in region-specific store level product mix.

Although the direct oversight change is relatively new, we are very encouraged by the preliminary results. An area of great importance to our success is retail category management and merchandising. This is an operational area that we believe has significant room for improvement and will strongly influence our ability to improve both sales growth and gross profit margins. Over the past 12 months, we have made significant managerial and operational changes in these two vital areas and in a short time we are seeing evidence of success. However, we must continue our efforts to adopt a coordinated and comprehensive retailing mindset, which threads through every element of our retail and distribution operations. It is through this effort in partnership with our independent customers, that we will be able to unlock our growth potential. As with our other programs, we expect continued adjustments until we begin to see better performance results. We have also established a new perishable product inventory control system with specific targets and a centralized monitoring and reporting system. The program has already been rolled out to all stores and we expect to see a meaningful reduction in inventory shrink during the first half of fiscal 2003. We believe that we have a very loyal customer base in the Ohio market. Our recent manager realignment, direct executive oversight and added attention, we expect to bring a better mix of products, services and prices to those Ohio communities. We want to reward their loyalty by exceeding their quality service and price expectations and use the renewed focus on operational excellence to attract new customers and improve our competitive standing. Recently conducted customer exit polls at 10 Ohio stores indicate that customers gave 100 percent of those stores high scores on overall shopping experience and 80 percent of those stores were rated very high on product quality and customer service metrics. We believe that is an outstanding customer base to build on. As mentioned in my opening remarks, we have had mixed success executing certain marketing initiatives, namely our Uniquest[phonetic] program. You may recall, we developed the program to leverage the buying and advertising power of our stores and independent customer stores. Although we believe the concept still holds great promise, under its existing structure, it has not met our international performance expectations and will require fundamental adjustments before we can harness its full potential. Our plans are to reorganize the program to focus on the products desired most by customers and products with strong appeal across the majority of the operating areas. We have also changed the advertising firm originally responsible for packing our media buys. In hindsight our advertising campaign under the program were not being directed to specific markets. We have recently launched, renewed and targeted advertising and merchandising campaigns. As we have previously stated, the program is a method of leveraging the strength of our entire retail and distribution network to improve the retail performance of the stores we own, as well as the stores we supply.

We will continue making changes to the program until we find the formula that produces the strong performance we believe it is capable of producing. Our new retail point of sale system is one of the essential building blocks necessary to support our future growth. The system is now generating to improve management process throughout the supply chain. We will now be effectively using the data to improve product demand forecasting process. The organizational and operational changes that I have just covered are certainly not the last. We are firmly committed and determined to become a more efficient and profitable organization. As we continue transitioning to our new business model, we expect further organizational, structural and operational changes. For the first half of fiscal 2003, we expect to see continued softness in our Michigan market sales results due to existing economic conditions and the shift in Easter holiday this year. Excluding the effect of the Easter shift, we expect our sales in the Ohio division to continue to improve on a comparable store basis, as a result of the operational changes underway and the markets absorption of the retail space added over the past year. We are expecting comparable store sales to be in the negative mid-single digit range during the first quarter and gradually improve to positive low-single digit range in the fourth quarter. Overall, we expect sales to range from 3 and a half to 3.6 billion with net income excluding non-recurrent charges in the range of 14 to 18 million. We will now open the call up for your questions.

Thank you. We will conduct the question and answer session. If you have a question, please press the * followed by 1 on the touchtone phone. You will hear a prompt acknowledging your request and your questions will be pulled in the order they are received. To decline, press * 2. Lift your handset before pressing keys. One moment, please.

Good morning. Couple of questions on a few things. I want to clarify something you said. The value of the real estate was above book value. Were you suggesting that real estate if sold, you would get 75 million for it?

We own our office and warehouse complex in Grand Rapids. We own the office in [inaudible] and other distribution centers, 14 grocery stores and other strip centers that we estimate that the value of that is 75 million in excess.

That would be more of a lease-back opportunity rather than bringing cash flow to the balance sheet?

Operational assets.

The Teamster's contract you just got, can you give us a sense of how reasonable the other side of the table was in the negotiations, especially with regard to dealing with the current economy and the company's competitive situation?

Chuck, I would start by saying our opinion of the negotiations was that the entire process was very reasonable. I believe that - this was with the Teamsters. They represent our associates in Grand Rapids and our drivers. The contract which we negotiated was competitive from the employees' standpoint in terms of the wage increase package they received. For us, it has been very positive in terms of revisions that we achieved in work rules. We were able to achieve significant productivity improvements. It was signed in October.

Productivity improvements enabled us to end our fiscal year below where we anticipated we would be for the year in terms of direct labor costs. That was directly attributable to the new contract and the work improvements we saw. Those benefits continue into the new fiscal year. And we see further potential as we explore opportunities for gain-sharing opportunities over and above the benefits we derived from the contract itself.

Okay. In this environment, Jim, can you talk about the opportunity to acquire retail customers? Whether you feel that they are getting some -- seeing some of the pressure your retail is seeing, as well and may be in more of a mood to sell? And the same question with regard to adding new wholesale customers.

In terms of our customers -- let me rephrase that, retailers who may be contemplating a sale of their business, we believe that provides an opportunity as those opportunities arise, we are continuing to pursue them. We have discussions with customers if that happens to be the case. I want to inject, Chuck, a comment about the whole topic of acquisitions. Given the challenges that we face in our current business, our primary -- I don't want to say sole because if an opportunity did arise, we would certainly talk to the people. Our primary focus is that we get our operations back to the level of profitability that they need to have. Our focus, including mine, as well as you heard in the comments of our senior management team, is focused on doing what needs to be done to get operations back to where they need to be. While it is still a focus and we want to stay in tune to opportunities that exist, we are not certainly aggressively pursuing acquisitions. That is not our focus today.

On the distribution side of the business, we have pursued opportunities with new customers and existing customers, that is the primary focus of our supply chain. inaudible] has responsibility for our distribution activities, and myself. I am not in the position where we have anything to report, but the discussion we have had, I think are worth us continuing to pursue it in the future.

Okay. Could you give us a description, based on what you have seen over the last several quarters, of the level of competitive intensity in northwest Ohio at this time?

The competitive landscape from the standpoint of absolute square footage is a very real part of the challenge that the market faces. As you go back and take a look at the fiscal changes, the square footage that has been added, there was a 12 percent increase in square footage in that market in the greater Toledo market. It is a market that is not growing. Just the dynamics of that additional square footage would have presented and has presented a challenge for everyone in the market. The competitive level is intense, as all of the players seek to establish themselves and their particular piece of the market. We have, through our own customer surveys and market surveys' intelligence, been able to support the fact we have not lost a significant advantage we enjoy and that is the convenience of our stores.

As Dave and I commented in our remarks this morning, there is a very significant effort on the basics that were in stock on the items that we are advertising. We are doing everything we can to create an atmosphere and provide an atmosphere for shoppers that they find pleasant. Again, as I said, based on our exit information, we believe that those efforts are showing benefits and in the form of what the customers see when they are at our stores. Competitive, yes, but I dare venture most markets around the country are competitive.

Okay. Last question, Jim, ignoring the SFAA142 in the first quarter, do you expect to see earnings positive in the first quarter?

Modestly, yes.

Thank you.

Thank you. The following question comes from Mr. James Wyland[phonetic], Wyland Management. Go ahead.

Could you comment on transactions and how it affects the competitive landscape? Secondly, with all the acquisitions for distribution [inaudible].

I am sorry, I caught the first part of the question, but I didn't catch the last part of your question.

With the recent acquisition activity in convenience store distribution companies, can you comment on the prices that were paid and what our position will be in the industry moving forward?

Okay. The first of all, the acquisition of Roundy's[phonetic] or the pending acquisition of Roundy's[phonetic], I guess I would have to say -- it would be presumptuous of me to speculate where that might go. I don't have any inside information or access to inside information. Certainly, we view Roundy's[phonetic] as a viable competitor. Time will tell how the new ownership will direct the efforts of this company. We certainly would expect that they would continue to be the competitor they have been in the past. In terms of the consolidation effort that continues on the convenience store front, it certainly - I don't, it is not a surprise, they are desirous of being national in scope in terms of meeting the needs of convenience store customers. The acquisitions fit into that particular strategic objective.

In terms of where we are, we continue to focus on growing our convenience store business. That has continued to be a focus of ours. Our results last year were not what we had hoped they would be, given the challenge we faced in replacing the K-mart business, we continue to be optimistic about our efforts to drive the results of our convenience division. I will add, we have said in the past, should there be any opportunities that arise, as with any other segment of our business, we will continue to explore whatever strategic opportunities exist for us to consider.

Lastly, as far as the food distribution business goes, were you profitable in the fourth quarter and what is the outlook for the profitability?

We were profitable in the fourth quarter and expect to continue to be profitable.

Okay. Profitability, profit margins, are they stable in wholesale food distribution?

Relatively stable.

Thank you.

Thank you. The next question comes from Dennis Riland[phonetic], private management group.

If I heard right, the profit for the year would be 14 to 18 million. How do you see that developing throughout the year? And whether or not it includes real estate sales?

Yeah, I guess what we would see is over the first two quarters, obviously, as we talked about sales in the Michigan market continuing to be soft, they would not be - it would not be evenly divided. We expect marginal profitability in the first quarter. We expect that to continue to improve throughout the year. So, certainly we expect the second half to be stronger. We expect that for a number of reasons. We expect that because the margin enhancement efforts we have underway, we believe will take more firmly in the second half of the year. We also believe as we cycle through a number of the competitive openings we have had, we realize the benefit from that. Additionally, we expect the economic outlook to improve over the year. Those are the major factors as to why we expect profitability to improve over the year.

Does it include real estate?

It does include real estate, as always. The gains will be relatively in line with prior year.

The goodwill charge of 35 million or so, I was wondering what if you could break that out? You have 155 million in the books. Based on these results, one might surmise the charge might actually be larger. I was wondering where you felt the need to [inaudible] down and where you felt a need not to?

We look at goodwill that is arisen from acquisition of retail. It benefited in all our business segments because we have sales in retail and also pass product to the retail from wholesale group. So, you know, I guess our overall view on that was we look at it on an overall basis. Our analysis is in line with what we believe the guide to be. You know, we obviously are not the only ones to have a write-off. There have not been very many people who haven't had a write-off. The fundamentals of our business, that is how we looked at it.

Mr. Riland[phonetic], does that complete your question? Thank you. Ladies and gentlemen, if there are additional questions at this time, please press the * followed by 1. If you are using a speakerphone, lift the handset before pressing any keys. Chuck Serecasky[phonetic], McDonald Investments.

I want to bother you again. Go through, please, the segment information you broke out, I didn't get all of it when you first discussed it.

Anything in particular you want me to go through?

Mostly through retail and the grocery distribution operations.

Look at retail segment, our overall sales were down 7.4 percent, but that was a lot to do with the 53rd week, which was worth about $25 million in last year's fourth quarter. Offset partially by Easter, which was approximately a $5 million impact. The overall adjustment for those factors were at negative 6.6 percent. Overall, we lost [inaudible] million. In the grocery distribution segment, sales were down 18 percent. But, again, adjusting for the 53rd week, which is worth about 23 or so and Easter, which was worth 4 to 5 million, the sales decline was 13 percent. One thing you have to remember, in that quarter last year, grocery distribution had sales to the Prevo's acquisition and that accounts for probably somewhere in the area of $10 million in sales lost for our distribution segment because this year they would be eliminated in the retail group. All and all, their earnings were 1.1 million compared to 1.5 million in the prior year.

Thank you.

The next question is from James Wiland[phonetic]. Go ahead.

In Ohio, do you see more competitive openings over the next 12 months?

There are several more openings in the greater Toledo area. So, yes, if there are a few additional locations where we will see new competition or enhanced competition. But, the majority of the openings are in the market and we are dealing with them.

If it is -- last year was a 12 percent increase in square footage, what are people saying and what are they smoking? Why are they doing this?

When you get the answer to that question, you, Dave and the rest of us would love the insight. It is something that we don't understand, but we are going to focus our efforts on doing what we need to do to respond to market conditions and why people are doing what they may be doing is something that we can only speculate about.

Talk about the performance of The Pharm stores and what you see for that operation moving forward.

The Pharm continues to be a format with lock long-term potential outside of the Ohio market. The impact on sales in so far as The Pharm operation is concerned, was also a negative, but what we have seen, they have rebounded much more quickly. They are much more resilient. We have seen that the impact on store sales in The Pharm group has not been as significant in the traditional supermarkets.

Do you look at converting any more existing stores to different formats in the Ohio market?

We are continuing to review store-base to see what the best long-term use of the facility may be. That is something we are doing across our entire network, not just in Ohio.

Thanks. There are no further questions, please continue.

We will conclude the call. On behalf of Dave Staples and everyone else on the Spartan team, I thank you for dialing in and look forward to discussing our first quarter results with you in about three months. Thank you.

Thank you. This concludes the conference call for today. Thank you for participating and please disconnect your lines.